Iran Feature: Subsidy Cuts --- The Product of Ahmadinejad's Genius? (Farokhnia)

UPDATE 1100 GMT: An EA correspondent comments:

The premises of this article are all wrong - the author is attributing to ahmadinejad what is entailed by the subsidy scrap plans devised since the mid Nineties. The issue here is not whether these recipes are good or bad - they are positive, but there are serious doubts as to whether the Ahmadinejad clique is able implement any of them correctly, given its penchant to antagonise, as they proceed, the critical economists.

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Hamid Farokhnia, a staff writer at Iran Labor Report, analyses for Tehran Bureau:

Once again, President Mahmoud Ahmadinejad may have confounded his adversaries without their realizing it. In the week since the so-called Subsidies Rationalization Plan took effect, there has been a chorus of derisive comments by sundry experts purporting to demonstrate the speciousness of the entire reform package. A closer look at the plan, however, shows that far from being a muddled and misconceived effort, it is a bold and well-considered scheme with very clear objectives -- albeit very disagreeable ones. In the first six months of the plan, the combination of subsidy cuts and cash handouts will eliminate some 60 percent of all subsidies, add vast sums to the government's coffers, help pay off government debts, create a new class of political supporters for Ahmadinejad's administration, and ensure his continued ascendancy beyond the 2011 and 2012 elections.

Ahmadinejad's "price rationalization," as it is being called in Tehran, is unlike any other liberalization scheme. From Latin America to East Asia to Central Europe, previous examples have aimed one way or other at ending economic distortions and inefficiencies by giving free rein to market forces. Economic reformers have traditionally sought to do several of the following objectives in tandem:

* (1) lifting all subsidies

* (2) implementing structural reforms, such as elimination of state-owned monopolies

* (3) ending prices controls, at least partially

* (4) liberalizing labor and capital markets

* (5) privatizing

* (6) reducing or minimizing government intervention

* (7) liberalizing foreign exchange markets

* (8) facilitating enterprises to restructure

Ahmadinejad is pursuing none of these objectives. For instance, we see an actual tightening of price controls. Likewise, industries will face higher utility and input costs, without any prospect for technological innovation and with no low-interest loans available. Even at the heart of Ahmadinejad's plan -- the elimination of subsidies -- we see a heterodox model: The government is giving cash handouts to nearly 58 million people. This is itself a form of subsidy, albeit liquid. (He promised last week to double those cash handouts next year.) The first question to ask is, What are Ahmadinejad's true objectives?

Before answering this question, a close examination of the available facts is necessary. Under the plan, the price of gasoline and electricity triples, the price of natural gas for cooking and home heating quadruples, and the prices for vehicular natural gas, diesel fuel, and water rise by factors of 10, 9 and 5, respectively. The price of bread flour has increased by a whopping 40 times.

As a result, water and electricity prices are now close to the global average, flour has reached the average, and diesel is halfway there. In sum, Ahmadinejad has almost immediately implemented 60 percent of the subsidies cut. What most people don't realize is that he was required by law to do so not in the course of three months but over three years of a five-year plan.

In addition, by compressing the planned schedule of cash payments for the first year of the rationalization plan to one quarter, each eligible recipient now stands to receive $44 a month instead of the original $10 -- a seemingly noble, but in reality politically motivated effort.

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